Embrace a Higher Minimum Wage to Win, McDonald's

Adam Hartung
, ContributorBusiness Success today requires identifying and dealing with market shifts. It is insufficient to be operationally excellent, you have to be agile to deal with changing marketsOpinions expressed by Forbes Contributors are their own.

There is a definite trend toward raising America'sminimum wage. Regardless one's political beliefs, pressure to increase the minimum wage keeps growing. The important question for business leaders is, "Are we prepared for a $12 or $15 minimum wage?"

The implications for businesses that use low-priced labor are clear. It is time to change the business model - to adapt for a different future. A higher minimum wage does not doom McDonald's - but it will force the company to adapt. If McDonald's (and Burger King, Wendy's, Subway, Dominos, Pizza Hut, and others) doesn't adapt the future will be very ugly for their customers and the company. But if these companies do adapt there is no reason the minimum wage will hurt them unnecessarily hard.

McDonald's should never have sold Chipotle

The chains that replaced McDonald's were Five Guys, Chick-fil-A and Chipotle. You might remember that in 1998 McDonald's started investing in Chipotle, and by 2001 McDonald's owned the chain. And Chipotle's grew rapidly, from a handful of restaurants to over 500. But then in 2006 McDonald's sold all its Chipotle stock as the company went IPO, and used the proceeds to invest in upgrading McDonald's stores and streamlining the supply chain toward higher profits on the "core" business.

Now, McDonald's is shrinking, while Chipotle is growing. Bloomberg/BusinessWeek headlined "Chipotle: The One That Got Away From McDonalds" (Oct. 3, 2013.) Investors were well served to trade in McDonald's stock for Chipotle's. And franchisees have suffered through sales problems as they raised prices off the old "dollar menu" while suffering higher food costs creating shrinking margins. Meanwhile Chipotle's franchisees have been able to charge more, while keeping customers very happy, and maintain margins while paying higher wages. In a nutshell, Chipotle's (and similar competitors) has captured the lost McDonald's business as trends favor their business.

But that does not mean "game over" for McDonald's

All McDonald's, Burger King and Wendy's need to do is adapt. Fighting the higher minimum wage will lead to a lot of grief. There is no doubt wages will go up. So the smarter thing to do is figure out what these stores must look like when minimum wage doubles. What changes must happen to the menu, to the store look, to the brand image in order for the company to continue attracting customers profitably?

While existing branding must change, these companies also will benefit from revisiting their strategy and behaving like McDonald's in the 1990s when buying Chipotle. Namely, they should buy chains with a different brand and value proposition which can flourish in a higher wage economy. These old-line restaurants don't have to forever remain dominated by their old brands, but rather can transition along with trends into companies with new brands and new products that are more desirable, and profitable, as trends change the game.